UK economy shows unexpected resilience despite high inflation and borrowing costs

Handelsbanken’s senior UK economist Daniel Mahoney argues that the British economy is holding up better than many feared, with first-half growth outpacing forecasts and inflation running below most predictions. Energy price spikes have been partly offset by declining wage and services inflation, limiting the rise in the headline rate. Nevertheless, the coming months will be tough as the Budget introduces fiscal uncertainty and the Bank of England plans a November interest-rate increase.

Mahoney points to the possibility of a renewed US-Iran diplomatic breakthrough, which could lower energy prices and gilt yields, and foresees inflation falling by 2027, potentially allowing rate cuts. He also notes that despite high gilt yields, the gap with other G7 bonds has narrowed, suggesting Britain is becoming less of a risk relative to peers. Finally, he highlights the UK’s flexible AI regulatory stance as a catalyst for future productivity gains.